Precious Points: A Bounce is a Bounce

"A continuation of reverses (signaling continued weakness) would most likely
continue to trigger liquidation of large gold positions and put downward pressure
on metals... What gold needs to get its groove back is a rebound in the economy
with an uptick in inflation." ~ Precious Points: Don't Fear the Repo,
May 13, 2007

The Fed continued reducing the money supply this week by failing to place
as many dollars through repos as were removed at maturity. Not surprisingly
then, metals continued their downward slide through the early part of last
week.

But, as expressed in the previous update, signs of a resilient economy began
the recovery and, in fact, gold and silver put in short term bottoms on Thursday
once investors digested optimistic statements by Chairman Bernanke and the
drop in jobless claims. Rate cut odds receded, as priced by the Fed funds futures,
and Friday's stronger than expected consumer sentiment sealed the deal, confirming
what the trend cycle charts were already suggesting was a tradeable bounce
at Thursday's close.

The 60min chart went positive (blue) during the first hour of trading Friday
morning and closed just slightly above the blue, dotted moving average line,
suggesting a continuation of the rally lies ahead. There's little news next
data, economic or earnings, but traders should remain cautious and not assume
a quick bounce is the start of a new uptrend.

Gold and silver rallied Friday despite a surge in the dollar against the
Euro and the Yen, and in the face of a triple-pronged tightening effort in
China. Metals could continue Friday's run if this rally in the dollar reverses
and takes out new lows, but because it will probably be very difficult to stage
a run to new highs in the face of a strengthening or even steady dollar, and
the attractiveness of U.S. markets has been has seemed to put a floor in the
dollar index. Platinum traded along the same general lines as gold and silver,
and the chart from last week continues to suggest the likely target for this
move.

Metals seemed to get a boost from stocks, perhaps because of hedging or allocation
maintenance, Week in and week out, stocks have gone higher and higher on foreign
investment and multinational profits, as the United States' accommodative money
markets remain an appealing home for foreign capital, but for the most part,
metals have not gone along for the ride.

Supply and demand of real physical metal continues to be a major factor in
preventing a freefall selloff in metals, but as mentioned in several previous
updates, it's investor demand that creates most of the price action in metals...
and to put it mildly, metals have not been attracting much investor attention
lately.

Months ago, the Fed threatened that slowing growth would dampen inflation
and they seem to have gotten their wish. Despite robust bank lending, M2 has
actually started a mild contraction and the Fed has reduced the total volume
of it's sloshing repo funds for four consecutive weeks. The last round of inflation
data was relatively tame and the net result has been stagnation in the metals
bull.

This update is on the record as saying that gradual deflating of the bubble
in China's red-hot stock market would benefit metals long term if it prevents
a collapse. There's speculation that the recent spike in bond yields is a result
in China swapping out of a large chunk of their U.S. Treasuries holdings, which
could also be a motivation for the Fed's recent stinginess. The gradual rising
trend in global interest rates is only beneficial to metals if it does not
begin to flatten inflation readings, and with China starting to apply the breaks,
the best way to maintain this is through a resurgence in the U.S. economy.

So, consumer confidence helped end the week on a positive note, but consumer
confidence is not consumer spending, and that's what will ultimately have to
continue if the economy is going to turn around. If China is partly responsible
for the selloff in bonds, then there isn't as much economic optimism as might
otherwise be read into the spike in yields. Until the economy recovers, new
highs in the metals aren't on the way, and, if the downside seems at least
for the time being to be limited, the reality continues to be more of the rangebound
trading this update has been expecting for weeks.

In the alternative, stocks could be overextended and due for a pullback, and
metals probably won't provide much cover. The silver chart below illustrates
such a scenario. Having violated the trendline, the critical levels to watch
are the 50-day moving average on the weekly chart just above $12.50 (the bottom
end of the expected range), and the previous lows at about $12.50 and $12.
Losing the first level suggests a move to at least the second. If silver holds
the previous swing at the $12.50 area, it may have another up move in it, but
if not, we may have already seen an intermediate term top, which brings the
200-day moving average into play.

RSI hints that silver is at or near a bottom, and if stocks continue to move
into a parabolic ascent, the metals will probably be spared a selloff, at least
while the rally is on. For gold, risk of a double top at $700 becomes the challenge
in that case. The chart below shows gold catching support last week at the
multi-year trendline. If this level is lost, the 50-day moving average represents
support in the $635 area. Even a decline to $610 would preserve the uptrend
from the June '06 lows.

TTC's proprietary 60min trend chart is looking for this move to continue,
but that doesn't necessarily require a dramatic change in price. In fact, the
entire previous up-cycle, a period of about 2 days and 6 points, is still pictured
in the chart below, suggesting that sometimes a bounce is just a bounce.

But the purpose of this update is not to provide ideas for intraday trades,
just to discuss larger week-to-week trends in metals. For short term futures
trading, you'll want to use the trend cycle charts and the good people at TTC,
where membership is still just $50 for a month ... but not for long!

This update is provided as general information and is not
an investment recommendation. TTC accepts no liability whatsoever for any losses
resulting from action taken based on the contents of its charts, commentaries,
or price data. Securities and commodities markets involve inherent risk and
not all positions are suitable for each individual. Check with your licensed
financial advisor or broker prior to taking any action.